US Dollar looks wobbly ahead of PCE release

• The US Dollar continues its retreat against most major pairs on Friday. 
• Traders are having it difficult to value the next directional move for the US Dollar. 
• The US Dollar Index continues its downtrend pattern and could face 105.00 should US PCE inflation data come in below expectations. 

The US Dollar (USD) was all over the place on Thursday after the release of the preliminary US Gross Domestic Product (GDP) for the first quarter. The USD first jumped on the high Personal Consumption Expenditure (PCE) numbers in that release with the idea that initial interest-rate cuts will take even longer to occur, with probabilities for December briefly overtaking September. As the dust settled, markets took all figures into account and saw it as a stagflationary play, with equities shooting higher and weighting on the USD as rate cuts could still be on the table for 2024 and discarding earlier rumours of a possible rate hike. 

On the economic data front, all eyes are now on the US Federal Reserve’s (Fed) preferred inflation gauge. The Personal Consumption Expenditure (PCE) Price Index will be released, together with the Personal Income and Spending numbers. With the markets already having priced in higher inflation, the question is if today’s data can still trigger a substantial move or will rather become a “ buy the rumour, sell the fact” textbook example. 

Daily digest market movers: PCE expectations hyped up

• Overnight, the Bank of Japan (BoJ) kept its interest rates unchanged, triggering USD/JPY to hit 156.80.
• At 12:30 GMT, the Personal Consumption Expenditures (PCE) data for March is set to be released:
  • Both monthly headline and core PCE are expected to rise at the same pace of 0.3% registered in February.
  • Yearly headline PCE is expected to tick up slightly to 2.6% from 2.5%.
  • Yearly core PCE is expected to slide lower to 2.6% from 2.8%.
  • Monthly Personal Income should rise to 0.5% from 0.3%.
  • Monthly Personal Spending should weaken to 0.6% from 0.8%.
• At 14:00 GMT, the last data element to close off this week will be the University of Michigan final data for April:
  • Consumer Sentiment is expected to remain quite stable from its preliminary reading, ticking to 77.8 from 77.9.
  • Five-year consumer inflation expectations are expected to remain cemented at 3%.
• Equities are overall in the green on the back of that Bank of Japan rate decision. Across the board from Asia, over Europe to the US futures, all major indices are trading with gains.
• The CME Fedwatch Tool suggests there is an 88.5% probability that June will still see no change to the Federal Reserve's feds fund rate. Odds of a rate cut in July are out of the cards, while for September the tool shows a 44.6% chance that rates will be lower than current levels.
• The benchmark 10-year US Treasury Note trades around 4.67% and keeps lingering around this level.

US Dollar Index Technical Analysis: Stagflation? Disinflation?

The US Dollar Index (DXY) continues its bearish pattern and looks almost inevitable to close the week in the red. The big question is which cycle the US economy is in, as clearly that exceptionalism label is coming off. Stagflation would be the worst possible scenario for the Fed, being unable to cut interest rates with elevated inflation while US performance is deteriorating. 

On the upside, 105.88 (a pivotal level since March 2023) needs to be recovered again before targeting the April 16 high at 106.52. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high. 

On the downside, 105.12 and 104.60 should act as support ahead of the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.40 and 104.10, respectively. If those levels are unable to hold, the 100-day SMA near 103.70 is the next best candidate.